E-minis approaching all-time high: Will they break through?

Today, the March S&P E-minis traded to a ninth unbroken new session high. The contract recovered 108 points or 6.25% from the Feb. 5 low. The relentless recovery begs the question as to whether overbought conditions exist that could result in some weaker price action once again.

For guide, ESH4 is again near record high levels accomplished only last month. The six session series of probes above 1840 ending on Jan. 23 illustrates a rather significant resistance level that was first attempted on the final session of 2013. Clearly the combination of the rapid (9-session) recovery and the confirmed resistance at 1840-45 will be enough to entice some longs to take profit.

Otherwise, intermediate term overbought conditions have receded as a result of the late January/early February sell-off and this might help drive a wedge through the aforementioned resistance.

On Feb. 6 ESH4 indicated a rejection of the bearish implications of the precipitous decline from three sessions earlier. The impressive 44-point open to close fall on the first session of this month found many wondering if the scaling back of the Fed’s purchase program (Tapering) had signaled an end to the asset support monetary policy has provided. More recently, concerns have drifted to weaker than expected economic reports and the durability of the economic growth seen into the second half of 2013.

While it is not the entire answer to the weaker economic reports, more today are willing to recognize weather as having a meaningful impact on economic growth over the last two months. Also, there is still an enormous amount of monetary support provided. Even when the Fed concludes further additions of accommodation through additional securities purchases throughout most of the balance of this year, it will still have as ongoing support a huge stock of Treasury and Agency mortgage-backed securities. Additionally, the Fed has committed to holding its policy fed funds rate at a low level for a period following recovered growth which will provide further economic support.

Bottom Line: Economic reports have been weaker and the Fed is expected to continue paring back its purchase program. Still, S&Ps continues its strong advance and looks to make a strong test of prior highs. Today there is room for both those who see weaker growth and strong growth to meet on the bullish side of the question-where does the S&P go from here. Those who see weaker economic growth forthcoming might expect additional Fed accommodation while those who expect a return to above-trend economic growth believe that the earnings power will ignite further equity gains.

At this stage, expect the S&P to break through to new highs; do not overreact if it does not happen today.